Apple TV To Center On Software Ecosystem: Barclays

By Teresa Rivas

Barclays’ Ben Reitzes talks Apple TV in a note out today, writing that the company’s talks with cable providers likely means that it is pushing toward “a software-driven ecosystem linked to iTunes,” even if its goal of a fully integrated TV is farther off.

He notes that this kind of set-top box approach isn’t without its challenges, but “we expect Apple (AAPL) to eventually link iPads, iPhones and Macs with iTunes in the living room.”

As for Apple’s new title as world’s most valuable company, Reitzes writes that investors have been piling into the shares, grateful that the new iPhone 5 seems to be on track for next month’s launch, skirting potential problem areas. “We believe investors are willing to look through near-term weakness in Macs, iPhones and even the new iPad for the upside in the holiday quarter.”

Reitzes has an Outperform rating and $750 price target on the company. Read more in-depth analysis of Apple TV below:

The Wall Street Journal recently reported that Apple is in the process of developing a set top box that can deliver a cable feed. Following months of speculation on Apple’s TV plans it appears the company is still in talks with service and content providers to bring the company’s products into the living room. The most recent talks are reported to be with the largest U.S. cable operators about integrating traditional cable content with an “Apple TV” set top box. An Apple set top box could compete with the likes of TiVo (TIVO) and Samsung Electronics (005930KS), but really seems to point toward Apple’s desire to develop a software-driven ecosystem, not just hardware – while no agreements have yet been made.

We still believe that Apple eventually would like to release a fully integrated TV ecosystem that acts as a digital hub for the home and takes on many computing tasks (taking the iPad to the big screen). Eventually such an ecosystem could pressure consumer desktops in the way that iPads have pressured consumer notebooks in our opinion. We believe consumers would welcome such a product from Apple as well given that many younger customers seem to be watching content on demand on smaller screens (iPads, laptops) in private places – and only Apple seems to be the company that can redirect that content back to the big screen. Also, the trend toward “small screen” viewing seems to be providing less advertising revenue than traditional “big screen” viewing under the current cable TV model, so Apple may hold the cards in being the only company that can fully monetize the small screens for big media companies. The risk of not partnering with Apple is that as young people may “cut the cord” given the cost of cable and that a screen connected to an Apple TV with AirPlay can provide a substantial array of content, with the exception of in-market sports and recent TV content (unless purchased on a per episode basis through iTunes).

Our colleague, James Ratcliffe has found little evidence to date to suggest there is significant cord cutting, We believe that any entry into the television market whether it is merely as a set-top box evolution of the current Apple TV or a full featured television will be lead by an ecosystem – powered by software married to content. Also, we envision an ecosystem where iPads could possible act as “central command”, increasing the utility of the device. While we acknowledge that a set top box could be a compelling evolution of the current Apple TV product, there are real challenges to such an implementation. U.S. Media Analyst Anthony DiClemente believes that it is unlikely that cable companies would open up their content environment to Apple. Furthermore, he notes that as cable companies are not yet losing subscribers at a material rate, so there is no major stimulus yet to adopt an open architecture to allow an Apple set top box. The music industry on the other hand was threatened by Napster and other online music sharing sites – thus being compelled to turn to Apple.

We believe that there is an already defined interface to bring an Apple TV ecosystem to life with a more in-depth and involved user experience as consumers should theoretically be able to use iPads and iPhones as remotes. These input devices could make the home television extend beyond a content consumption platform an easy way to check email and the web as well as share photos (and possibly edit them in the same way an iPhone/iPad can). We also would not be surprised to see the ecosystem double as a gaming platform – in addition to taking on tasks of a desktop PC and a media hub.

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